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Flexsteel Industries Is A Net-Net With Great Management

Harry Sauers profile picture
Harry Sauers


  • Flexsteel Industries is a furniture manufacturer facing major troubles from the COVID-19 pandemic.
  • They have a strong cash position making them well-equipped to weather the storm, and many of their factories have already opened up again, with social distancing.
  • Management has demonstrated an extremely pro-shareholder attitude, willingly taking pay cuts, divesting non-core businesses, and reducing expenses when possible.
  • The stock trades right around two-thirds of net current asset value, making it a Benjamin Graham "net-net" stock, and providing a steep margin of safety for investors.

Flexsteel Industries (NASDAQ:FLXS) is a furniture manufacturer, largely focused on higher-end residential products including sofas, recliners, and beds. The name “Flexsteel” is derived from their trademark blue steel springs that come inside each piece of furniture and carry a lifetime warranty – a strong value proposition.

Flexsteel has been in business since 1893, and has typically focused on this upper-middle market segment. They largely sell to retailers, but maintain direct-to-consumer channels as well as a burgeoning e-commerce presence – though I was unable to find much aside from a Wayfair page with two products. Perhaps they could use some SEO.

Collapsing Stock Price

The stock is down more than 50% over the past twelve months, due to a few key reasons – mostly coronavirus, but also some more typical problems like secular industry declines, restructuring charges, and GAAP operating losses.

Management has chosen to raise cash by drawing on credit lines and pushing out accounts payable – moves that I believe are sensible, given the state of capital markets and the massive uncertainty we face going forward. Cash reserves are vital here, and Flexsteel holds nearly $60mm worth, likely enough to meet expenses for at least a year of virtually no revenues. Flexsteel has a current ratio around 3x, and holds cash just under current liabilities.

Management Track Record

Flexsteel’s CEO is Jerry Dittmer, a furniture executive who holds an MBA from the University of Michigan. He has a successful 25+ year record in furniture, largely in Hon Co. and HNI Corporation (HNI). HNI Corporation is publicly traded, which makes Mr. Dittmer’s record easy to assess: he came on as VP/CFO in 2004, and became Executive Vice President in 2008, a role that he held until 2017, where he pivoted to SVP of Strategic Development.

HNI was greatly impacted by

This article was written by

Harry Sauers profile picture
Research Analyst at Gate City Capital Management, focused mostly on micro-caps & OTC. Interested in cigar butts, asset plays, liquidations, distressed, special situations, etc. Messages and emails are welcome.

Analyst’s Disclosure: I am/we are long FLXS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (46)

The Private Island Saver profile picture
Doubled my money on this stock, based on your article, thanks!
By my calculations FLXS hit NCAV today and I sold for a 71% gain in just under two months. Much quicker turnaround(in the stock price) than the typical Net Net. Thanks Harry for highlighting this stock and helping your followers build wealth!
Harry Sauers profile picture
I sold today at NCAV as well. Congratulations on a successful play, and yes indeed it was an impressively fast turnaround. I suppose that's what happens when you get an EBITDA-positive company run by honest, competent managers with skin in the game! If only there were more Flexsteels out there, I'm almost sorry to see it gone from my portfolio.
If you were "almost" sorry then, how do you feel now? ;)

I sold, and reentered at a higher price. Hard to sell when it just keeps going up and more importantly insiders keep scooping. Great story, and great article. Long BSET too
Harry Sauers profile picture
It's been on a tear! Insider buys are very much a strong sign, and while the short-term results have been somewhat bleak I think they're set up to do well in the future with top-notch management.

That said, hindsight is 20-20. Without a wide enough margin of safety few things are sure.
06 Jun. 2020
Hi! Thx for your analysis!
What do you think about value investing in general? There are a lot of evidence that growth is outperforming value, I think since 2012. Even in DCF valuation growth stocks get more points than value stocks because of low interest rates. Maybe it's time for value investing only when we have high interest rates?
Harry Sauers profile picture
My performance didn't get the memo, it seems. ;)

It's difficult to capture value investing as a factor, and for that reason I think a lot of the studies about it are somewhat flawed. Take a look at any classic way of measuring value: low price to book (most common), low PE, low EV/EBIT... While these all measure "cheapness," they do not measure "goodness," or the quality of earnings or assets. There's a lot of horrendous stocks out there with single-digit PEs I wouldn't touch, and plenty with 20+ that I would happily own.

Based on these value factors, a Chinese scam trading at a low P/B and P/E would be included, while a growing, moaty company at a reasonable price like Starbucks would be excluded. Is this an accurate representation of value investing?

Another point is that growth can be value. Value investing is predicated on paying less than something is worth, so if you believe that Amazon's cash flow between now and judgement day is worth a whole lot more than the market cap, that's a value investment. While I happen to prefer cigar butts, there's plenty of money to be made on the other side as well. It might help to differentiate between "growth" and "glamour."

To quote Graham, "a stock (and even a bond) may have investment merit
at one price level but not at another." It follows that at a sufficiently high price, securities of all kinds become speculative, whether it's a distressed oil bond or Google shares trading at ten times what they are now. These may hold plenty of upside, but they do not promise protection of principal.

In regards to your latter argument, I think it circles back again to how value is defined. Is it for a company to generate most of its net present value of future cash flows now rather than in the future? This runs contrary to paying less than something is worth, if that is what your DCF indicates. Interest rates obviously matter, and almost by definition low rates encourage speculative investment especially when credit and duration spreads are low as well.

By all means, factor in an appropriate discount rate to your investments, but it doesn't mean to buy the fastest-growing stock you can find regardless of the price.
PriceMatters1949 profile picture
Harry, looks like FLXS took your recommendation during the call. $6 million approved for share repurchases. I was happy to see this come out.
Harry Sauers profile picture
It looks that way! I'm definitely relieved to see that outcome. I'm not sure what more I would want... It seems that we are in good hands.
This article helped me narrow down my basket of Net Nets. Nice 15% uptick today. Plan to sell when it FLXS hits NCAV. Keep up the excellent work!
Harry Sauers profile picture
Glad to have helped. I agree -- there's a few puffs left, but I'm not interested in hanging around past NCAV.
PriceMatters1949 profile picture
HI Harry, great write up and insights. I have been long FLXS for awhile. I got in too early but am confident they will turnaround. The net-net is an interesting strategy and I mix some into my portfolio. Recently I read a speech that Charlie Munger gave back in the 80's. He noted that the Ben Graham method is harder to execute now because of changes in corporate laws. He said back in Ben's day, if a company could be bought for less then cash minus liabilities. A person would buy it and liquidate, but its hard to do that these days. You can't just fire everyone and walk away. Not knocking the net-net strategy, just thought it was an interesting take.
You ever look at HY bonds? Over the last month I have seen bonds trading so low that they are practically net-nets in themselves. I look at them as a special situation in the sense that the investment has a time component to it.
Harry Sauers profile picture
He's right to a degree -- it's harder and requires a bit of diligence, but taking over and liquidating is far from impossible so long as you have low insider ownership, no dual share class, no poison pill, and friendly state laws.

I think the real concern is that we have a bloated market and society and a lot of incompetent or self-serving managers are set up for life in some companies.

Net-net investing isn't predicated on my ability to do it, only that a basket of stocks with such a steep margin of safety is hard to not make money on over a few years. I think Munger's methods work better with more capital, while net-nets are suited for sub-$25mm.

I've been intrigued by HY and distressed bonds, but largely found that the infrastructure requirements are too great at this time.
PriceMatters1949 profile picture
You have down your homework and i'm impressed with your findings. I've taken investing quite seriously over the past 3 years. Unfortunately my net-net success has been limited. I've done well buying decent companies that I understand at a cheap price. Most of the net-nets I have found (and bought) had slightly negative earnings or break even. Over time they work their way out of being a good buy.
Harry Sauers profile picture
Regardless of your specific method, value investing works. Munger's quality approach certainly does work, I just happen to be more suited to dirt cheap asset plays personally.

Cigar butts are usually statistical bets -- I've even seen evidence that it works in biotech so long as you are sufficiently diversified. An important thing is that a lot of net-nets have negative GAAP EPS while not necessarily burning cash, or may have one-time charges from RX or a natural disaster.
TheStockMarcus profile picture
“Sell to optimist, buy from pessimist” I honestly couldn't believe the bargain I had stumbled upon when I came across this “cigar butt”. I thought The Father of Value investing himself would be proud, FLXS has had an D/E under 0.34 for the past 10 years as well as an Average Net Working Capital Ratio OVER 3.77, creating a bullet proof “margin of safety”, literally purchasing $1.00 for $0.33. Great article, I was entertained through out and I love see fellow Graham enthusiasts. Keep up the great work
Harry Sauers profile picture
There's not many of us left! It's a rare bargain, to be sure, and just a phone call to a PE shop of your choice could fetch us handsome returns. Feel free to shoot me a PM if you'd ever like to bounce some ideas around.
TheStockMarcus profile picture
For sure👍
This has a lot of work to do yet. Dividend cut, cost associated with divesting businesses, selling assets, covid losses, tariffs and competition.

Looks like this will get booted from the Russell Index this week which has probably prompted selling for the last few weeks as well and likely to keep the stock under pressure in May.
crap companies can become cheap enough to buy in certain situations this may need to get cheaper but the obsession with its low quality makes no sense. Net-nets are an asset play not a bet on a high quality business.
The Private Island Saver profile picture
At least you have liquidation value as a floor for value and if they can get the self-assembly online furniture sales going you may receive a nice return.
Harry Sauers profile picture
I sure would love to buy a profitable, stable, growing business with a moat at less than NCAV! Sadly, I have to settle for mediocre (crap) stocks with a mere 50% upside on liquidation.
The reason comments are railing against FLXS isn't because of your statistical analysis. It's because of your inaccurate depiction of the BOD and CEO. They could have written a better fluff piece to support your narrative.
I only understood more I was right. Happy I didn’t buy. This company is a crap.
FLXS is a dumpster fire. How can you possibly use COVID-19 to explain away an abysmal 4 year run? The BOD has hired and enabled 2 consecutive deleterious choices for CEO.
You state Mr Ditmer's experience in the furniture business but contract and residential furniture companies need to be run very differently. Meaning, no one in upper management has a clue about home furnishings and are learning on the fly during a pandemic. This once great company is on life support. They were a pillar in the Dubuque community and people lined up to work for them. I wish them the best but this is sad to watch.
PACKER man profile picture
Terrible company; they unceremoniously closed our factory here in Starkville, Ms and the one in Dubuque, Iowa...doubt that they are going to survive....I wouildn’t touch it with the proverbial “10 ‘ pole”!
Great article
Terrible company, very poor management. You forgot to say they have just closed PERMANENTLY facilities!
Harry Sauers profile picture
Good! Stop the bleeding while we can and focus in on profitable segments.

"furloughs and divesting non-core business lines..." How are these actions not vastly preferable to doing what a lot of other management's do: continuing to run unsuccessful, unprofitable operations that wipe out the shareholders equity?
@HarrySauers The bigger question is why did these segments become unprofitable?
Harry Sauers profile picture
Furniture is a bad industry to be in. Look at any relevant group of peers. Amazon and Ikea as well have permanently disrupted the industry. Divesting poor business lines here is essential in order to get that "last puff."

There's no question that Flexsteel is not a wonderful business. What matters here is the valuation and the steps that management will take going forward.
MWinMD profile picture
I love NCAV stocks but I see problems here. First of all, much of its NCAV is in AR and inventory. There's a classic "conservative liquidation value" formula that weights as

Cash + .75 * AR + .5 * Inventory - Liabilities

When I plug in your numbers I get about $7 a share, which is below where it's trading. It's comforting that the CEO has bought on the way down, but I think a lot of people have delusional ideas about how quickly all this is going to "blow over". It's not a matter of "if" but "how bad" the second round of this is going to be, and it's going to start in November. We won't have a vaccine till next spring at earliest, and remdesivir is (currently) just a marginal benefit.

Also, the company was averaging in the high $2+ range for EPS for four years. Then last year I see a $4 loss. What was that about? I have to wonder if the business cycle was turning even before the virus. You can only expand businesses and offices for so long before a breather in demand, I assume.
Harry Sauers profile picture
Net-net working capital is the more conservative metric, to be sure. My experience has shown that statistically, NCAV works just fine because you can find higher-quality opportunities. A positive NNWC (or one that isn't several multiples of the NCAV valuation) is still a great protector of margin of safety.

I've actually been experimenting with the idea that NCAV is actually the superior metric, since management has less cash to do stupid things with. AR and inventory really only have two ways to go: cash or write-off.

How do we know that coronavirus will come back for sure? I'm not a doctor or biologist, so I hesitate to invest based on macro speculation here. Even so, Flexsteel ought to be able to weather at least a full year.

The EPS difference is largely due to one-time and non-cash charges. Over the TTM Flexsteel generated $8.1mm in cash from operations and $38mm in free cash flow.
MWinMD profile picture
Thanks for the response. It's an interesting conjecture, that value in inventory is "safer" because it can't be spent, but then that seems a little circular. If it's to be part of the worst case situation, it has to become cash at some point.

I think that the current situation means that AR and inventory is even more precarious than an "average" time in market history. You may have a near-total global economic shutdown for over a year, in which time no one will buy any kind of capital goods. And accounts receivable may not be worth much, as many people and small businesses aren't even paying their rents now.

By the way, the "second bump" is a near-certainty because the best estimates (with big error bars) is that societal exposure is in the 5-10% range. You need to be around 60% to approach herd immunity such that the pandemic slowly peters out. Given that best case is to have a vaccine next spring, it's pretty much a given that we're in for a rough autumn/winter. It's just the nature of these novel epidemics. Everyone from Fauci to the CDC director has pretty much said this, though people are whistling away past the graveyard as if it's all some mystery.
Harry Sauers profile picture
Excellent point that it could become circular -- I suppose the one instance where that wouldn't apply would be a liquidation or acquisition. Both often good for us, I would think.

It's absolutely more precarious now than possibly ever before. Receivables seem to be worth close to 100¢ on the dollar per the earnings call, but the inventory is anyone's guess. Obviously, it's quite far from retail and I believe Flexsteel will lose some amount of pricing power going forward. Toss in random bailouts left and right, however, and semi-liquid assets dependent on short-term credit and consumer demand become much more difficult to value.

I'm certainly in agreement that market participants are largely acting like it's just about fine this early on, and as a result indices are starting to look expensive.

We can well may have a big second bump in infections, but the question here is if it is material to corporate earnings. I have no idea -- we could be looking at a death rate that's roughly the flu, if our current infection rate is around the high estimates. Toss in some miracle drugs and social distancing, and we could be in for a surprising second half of the year.

Then again, that's macro speculation. There's a whopping amount of unknowns, and fortunately I don't have to worry about short-term liquidity so I think the odds are in my favor here. Flexsteel has plenty of issues, but relative to just about anything you care to look at it's astoundingly cheap.
Harry Sauers profile picture
I was asked in a message about the "multi-employer" pension Flexsteel is a contributor to: I don't believe it's all that important to the stock, since it's largely adequately funded and the cost of exiting it today is only $18mm. Even factoring this in, the discount to NCAV is steep and the margin of safety compelling.
How much do you feel the hospitality business may be worth?
Harry Sauers profile picture
Hard to say. They don't break down revenues by business segment. Right now, I wonder if they could find a buyer at any price. It's also worth noting that only the "remaining" hospitality business has yet to be exited -- I imagine it wouldn't fetch a price that's meaningful to the valuation.
There you go. Good job!
agreed on the thesis may wait until its a little cheaper.
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